Wednesday, February 11, 2009

Self-imagined time constraints (everything, bridge, sport, stock, gambling)

We often make decisions based on our perception of time. Often these decisions are objectively wrong, but rational humans frequently fail to make completely objective or logical decisions. My favorite example is what economist Richard Thaler calls, "sudden death aversion". In the rest of this post, I will give examples of "sudden death aversion" as well as provide other scenarios I've noticed where we make illogical decisions related to our perception of time and how we create time constraints for ourselves that aren't really there. If anyone can think of more examples feel free to comment.

Sudden death aversion is exactly as it sounds. It's essentially a reluctance to commit oneself to a decision with an immediate outcome in favor of a decision that delays the outcome. I'm going to tweak Thaler's most famous sports example just a little bit to illustrate the point. Imagine a basketball game where your team is down by 2 with just enough time to execute one play. The chances of making a 3 point shot are 33% while the chances of making a 2 point shot are 50%. Furthermore, your team is the home/better team so that if it goes into overtime, your chances of winning are 55%. The math is simple. 33% versus (.5 x .55)= 27.5% And yet often in these situations the coach will call for a 2 point play because of a (wrong) perception that if given more time, they will have a better chance of winning. Another basketball example is when coaches are unwilling to play guys with foul trouble for fear of fouling out and then put them in too late when the game is all but lost. A frequent example in another sport is whether to go for it on 4th down late in the football game. Many NFL coaches screw up this decision fairly often. This phenomenon is also written about in bridge, where someone chooses a line of play that involves a few more tricks to be played instead of a slightly superior play of an immediate straight up finesse.

A different scenario is what I call the "casino effect". I see this happen a lot both to gamblers in casinos as well as to daytraders and I myself have suffered greatly from it (and still do from time to time). The simple example is when a gambler is gambling at a table game (blackjack, baccarat, poker, etc.) and his wife/friends tell him that they have to go soon to another commitment (show, dinner, etc.) Many times I've heard "I'll leave when I get back positive" or "I'll leave the moment I cut my losses in half". The problem with this is that this enforces a self-imagined time constraint, and causes the gambler to force the action for no real reason. Bad decisions such as overbetting or pure random gambling ("oh well, what the hell") occur all the time in these situations. The same happens to daytraders all the time with the exact same claims in an effort to minimize that specific day's loss or be positive for that specific day. This leads to overtrading, churning, and using too much risk, all in the name of a daily number instead of worrying about the overall P&L over the course of a year.

Another one that seems to happen a lot involves human interaction and is not a case where we deal with numbers. Imagine a couple fighting. Obviously tempers are flaring and each person thinks they're right. Instead of waiting to cool off, often times both parties are trying to continue to press their argument as if they won't ever be heard again if they don't do it immediately. Or say you upset your friend somehow. You call to apologize but they won't pick up. You leave a message to let them know you're sorry. And then, instead of waiting for your friend to simmer down, acknowledge your apology and sort things out, you end up calling him/her over and over because of a perceived time crunch that your apology must be heard now. This will more than likely cause the offended party to feel even more disgust at being bothered and make things worse. I'm not saying that everyone does these things, but I see examples like these a lot, and I don't understand this unnecessary time constraint that we all seem to put on ourselves now and again.


thg said...

I agree with your general premise, but think that the basketball and bridge examples are a bit flawed.

In basketball, the defending team may be paying more attention to the three-point shot, thus increasing the offensive team's ability to score two points. Also, in the event of a two-point attempt, the defending tea, will be very reluctant to play best defense and risk a foul (and potential three-point play). Both these things tend to increase the success percentage of a two-point play. This may not be rational action by the defenders, but it is the reality the offense is faced with.

In the case of a player with five fouls. If he is playing early in the 4th quarter, he will likely be tentative because he doesn't want to pick up the 5th foul. So, playing him is not necessarily better than playing his replacement. Perhaps that is the wrong approach for a player with five fouls, but I think it is what the coach is faced with.

In bridge, putting off a critical decision often allows declarer to gather extra information to make a better decision. Maybe it is taken to extremes, but in its basic form is is sound practice.

The Pretender said...

I don't remember the exact bridge example but I do know one came up in a women's international event between USA and UK. The second line of play meant that the finesse had to be forsaken. It wasn't about finding more information then deciding the line to take.

The point is that if given rational objective probabilities to make a logical decision, people still tend to skew their subjective probabilities and rationalize the delayed option as being far superior than it actually is. It's not that your examples might not be true, but that the actual impact of the extra information is probably smaller smaller than the credit you give it.

Josekin said...

Doesn't the casino effect apply to relationships as well?

The Pretender said...

Hadn't thought about that but yeah I can see the connection. Interesting view.